10 Tactics for Managing Offshore Costs
As some vendors talk of moving work back to the U.S., other vendors are employing best practices to maximize the business value of offshore operations while containing costs.
By S. Sadagopan, Satyam
Jul. 03, 2006
With all of the excitement about the benefits of offshoring software development hitting the news over the past few years, everyone knew the "hype" pendulum would no doubt begin to swing in the opposite direction. And it has.
There is mounting evidence that the bloom is off the offshoring rose, so to speak. Even the Sand Hill Group study on offshoring found evidence that communication challenges and rising costs were eroding satisfaction with offshore operations to some extent.
Last month, Mike Fields of Kana Communications wrote about his decision to end his company's offshore development . One of his key concerns was the rising costs his firm was experiencing.
Yet despite the challenges, offshoring remains a compelling option for many software companies. The vast majority of vendors continues to offshore and realizes significant competitive advantages for their companies. As their sophistication and experience with offshoring increases, many offshorers are seeking out new ways to control costs while retaining business value.
Looking Past the "Lowest Cost"
The fact of the matter is that "lowering costs" is only one of many reasons why enterprises offshore work. Many experts say the key to deciding between outsourcing and in-sourcing is the overall differentiated value that outsourcing can bring. This takes into account the maturity levels of internal competencies - not for just today's needs but for maintaining a certain degree of edge in this dimension for the near future. That's one reason why offshoring studies find that even dissatisfied offshorers are as likely to continue offshoring in the near future as satisfied ones.
Sourcing relationships actually encompass a wide array of choices given the dynamic nature of business and the intersections of various levels of capabilities that lay within enterprises and service providers. The increasing expectations associated with outsourcing are becoming difficult to meet. With a wide range of functions getting outsourced, the ability of the outsourcer to bind and manage all these functions meets with a varying degree of disruption. On the other hand, the service providers are coming under huge pressure to improve operational efficiencies and to maintain and enhance margins. Some analysts predict that a significant number of large offshore contracts may fail to make the cut in terms of meeting end objectives.
Unlike a supply chain network, outsourcing is not merely a cost-delegating mechanism - it actually provides for value-enhancing mechanisms like skill upgrades, added agility, scaling up and decreasing risk. The importance of offshoring increases with the gradual shift of the market landscape from working to user requirements to supporting customized IT environments to commonly shared infrastructure, open standards based processes and applications. With all this major organizations need to constantly assess their sourcing.
When large enterprises leverage the global delivery model, the range of their offshore utilization increases. As this happens, the focus typically moves beyond back-room functions into more strategic areas of the business. In this way, the standard bidding process becomes a less preferred model for offshore vendor selection.
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There is mounting evidence that the bloom is off the offshoring rose, so to speak. Even the Sand Hill Group study on offshoring found evidence that communication challenges and rising costs were eroding satisfaction with offshore operations to some extent.
Last month, Mike Fields of Kana Communications wrote about his decision to end his company's offshore development . One of his key concerns was the rising costs his firm was experiencing.
Yet despite the challenges, offshoring remains a compelling option for many software companies. The vast majority of vendors continues to offshore and realizes significant competitive advantages for their companies. As their sophistication and experience with offshoring increases, many offshorers are seeking out new ways to control costs while retaining business value.
Looking Past the "Lowest Cost"
The fact of the matter is that "lowering costs" is only one of many reasons why enterprises offshore work. Many experts say the key to deciding between outsourcing and in-sourcing is the overall differentiated value that outsourcing can bring. This takes into account the maturity levels of internal competencies - not for just today's needs but for maintaining a certain degree of edge in this dimension for the near future. That's one reason why offshoring studies find that even dissatisfied offshorers are as likely to continue offshoring in the near future as satisfied ones.
Sourcing relationships actually encompass a wide array of choices given the dynamic nature of business and the intersections of various levels of capabilities that lay within enterprises and service providers. The increasing expectations associated with outsourcing are becoming difficult to meet. With a wide range of functions getting outsourced, the ability of the outsourcer to bind and manage all these functions meets with a varying degree of disruption. On the other hand, the service providers are coming under huge pressure to improve operational efficiencies and to maintain and enhance margins. Some analysts predict that a significant number of large offshore contracts may fail to make the cut in terms of meeting end objectives.
Unlike a supply chain network, outsourcing is not merely a cost-delegating mechanism - it actually provides for value-enhancing mechanisms like skill upgrades, added agility, scaling up and decreasing risk. The importance of offshoring increases with the gradual shift of the market landscape from working to user requirements to supporting customized IT environments to commonly shared infrastructure, open standards based processes and applications. With all this major organizations need to constantly assess their sourcing.
When large enterprises leverage the global delivery model, the range of their offshore utilization increases. As this happens, the focus typically moves beyond back-room functions into more strategic areas of the business. In this way, the standard bidding process becomes a less preferred model for offshore vendor selection.
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